How penny auction websites can leave you with a hole in your pocket

Methods vary but the message at penny auctions is the same – make the winning bid and you can pick up expensive goods at a fraction of their value. But is it as straightforward as it seems?

Somewhere in the UK a person going by the name of “minga60″ must be feeling gutted. He recently spent more than £200 trying to win a 32″ LG flatscreen TV at penny auction website Madbid.com, only to see a rival bidder steal in and win it at the last second.

Madbid.com, and rivals such as Bid Budgie and Fastbidding.com, are at the forefront of an explosion in penny auction websites in the UK, with shoppers enticed by gaudy adverts boasting that Sony PlayStations have sold for a fiver or MacBook Pros for £90. But a closer look reveals that consumers can end up with nothing to show for it.

Unlike eBay, where bids are free and you only pay the price at which you win an item, participants in a penny auction must pay to place each bid as well as the final price of an item should they win it. Of course, there can be only one winner so everyone else is left out of pocket.

At Madbid.com it works like this. To place a bid you need to buy credits sold in blocks typically costing £9.99 for 80 or £374.99 for 3,750, meaning individual credits cost 10p-12.5p. You need up to six credits to make a single bid. This means that bidding on some items can cost as much as 75p each time. Each bid raises the auction price of an item by 1p and at the same time extends the closing time of the auction by up to 60 seconds.

Things are even more confusing at FastBidding.com, where some auctions close temporarily and there are different styles of auction, including ones that offer cashback, “equal bid” auctions and “lowest unique bid” auctions. At sites such as this, beginners need to tread even more carefully.

At BidBudgie.co.uk, where everything is apparently “going cheep”, users must make the lowest unique bid to win – an incredibly confusing system where you must ensure you are the only person who has registered a bid at, say, 3p. The trick is that rivals can also bid 3p to ensure your bid is no longer unique, then enter their own unique bid of, say, 4p and take the lead. Bids cost money unless you enter a free auction – to win credit that can only be used on BidBudgie.

With penny auction websites everyone helps ramp up the price and, at some sites, as long as people keep bidding the auction never ends. If you win, how much you eventually pay depends on how many credits it took to place each bid, how many times you bid, and the eventual sale price.

We took a detailed look at the bidding history for Madbid’s recent LG TV auction, which required four credits per bid. We found that 79 people placed bids in total and the winner spent £217.60 on bids to win the TV – at great cost to rival bidders. Thirty nine of them bid once and so lost only 40p (assuming they bought credits at the cheapest rate of 10p per credit); 10 people lost 80p after making two bids; while 19 people wasted between £1.20 and £4.80.

Nine people spent between £5 and £30, but the failed bidder who lost the most cash was minga60, who wasted £211.60 by placing 529 bids.

Madbid can make a lot more than the sale price on each item. On the LG TV, Madbid could have raked in as much as £612, assuming all bidders spent 10p to buy each credit. That’s £162 more than the recommended retail price of £450.

Similarly, we have calculated that by attracting 252,907 bids Madbid could have made £151,744.20 on an Audi A3 Sportback that had an RRP of £18,790 – 600% more than the cost of the car.

But it often loses money too. A pair of hair tongs worth £40 recently sold for 25p, making Madbid as little as £10 from the 25 bids it attracted. A men’s Fila watch worth £139 attracted only 23 bids, worth as little as £9.20 to the website.

Dr Mark Griffiths, professor of gambling studies at Nottingham Trent University, says bidding on these types of auctions is gambling: “Winning a penny auction is essentially chance-determined and does not depend on any discernible skill – a person can bid again and again with no certainty that they will ever win the product. If there is no real skill in participating and it is essentially a chance activity, how is this not a form of gambling? The vast majority of people who bid on penny auction websites do not get anything for their money, except the hope of winning.”

But the UK’s Gambling Commission has refused to acknowledge penny auction sites are gambling operations, something Madbid.com agrees with. A spokesman says Madbid is an “interactive social auction website … that features a ‘buy it now’ option, refund policies and interactive elements, creating a fun shopping experience that requires skill and strategy to land bargains”. The “buy it now” option allows users to buy a product at a slight discount off the RRP. If it is a product users have bid on already, they can use their spent credits to further discount the price.

The internet is awash with penny auction forums where fans debate strategy and share tips, but there are also threads such as “Penny Burn Out?” for people who have spent too long bidding on auctions. One poster wrote: “I think bidding is taking up too much of my time. I may have to add up all my costs vs wins and decide it [sic] this is really worth it. At the very least, I have to slow down. Its taking too much time away from my relationship. Not cool.”

Griffith has made repeated calls for the sites to be regulated, and in late 2010 the OFT clamped down on the use of auto-bid functions by some companies that were using software programs to place artificial bids against consumers – this led to the closure of BattyBid. But the OFT says it has nothing to add to the work it has already done.

Madbid’s Facebook page attracts many positive comments from its fans, though there are also regular criticisms of the group’s customer service and complaints about the cost and difficulty of winning auctions. Thomas Richards, wrote: “You never win a bid so what’s the point in putting money on the website its all a con.” Another dissatisfied customer, Richard Harrison, wrote: “I wouldn’t bother it’s a joke. Items not sent and the worst customer service in the world.”

The Madbid.com spokesman said it is a “misconception” that penny auction sites are a scam, adding that Madbid does not make false claims in its advertising. “We have been reviewed by the world’s fifth largest independent accounting network, BDO, which looked at the specific control procedures used by MadBid.com to ensure the legitimacy of our auction model. It concluded that MadBid.com winners had average savings of 81% (including final auction prices and cost of bids) when compared to the RRP.” He added that Madbid takes customer complaints “very seriously” and looks into each one, “whether it comes via email, a phone call, Facebook or Twitter”.

Madbid’s parent company, Marcandi Ltd, appears to be in poor financial health. It’s latest report and accounts show it lost £395,915 in the year to 30 June 2010 – a figure one leading accountant called “a substantial amount of money”. He believed Marcandi continues trading only because it received a large cash injection from shareholders and said he viewed the future prospects of this company with deep suspicion.

Perhaps this is unsurprising, given that Madbid is a recent start-up. Indeed, legions of penny auction sites have folded, including Swoopo, Rapid Bargain and Bid Boogie.

Madbid’s spokesman would not discuss the company’s financial health but said its mission is to “revolutionise the way consumers shop online, offering an entertaining alternative to the likes of Amazon and eBay”.